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Alliance Data Beats, Guides Higher - Analyst Blog

Alliance Data Systems Corporation
(
ADS
) reported adjusted earnings of $2.13 per share for second quarter
2012, substantially ahead of the Zacks Consensus Estimate of $1.77.
Results increased approximately 22% year over year and outperformed
the guidance of $1.85. Adjusted net income for the quarter was $136
million, improving 33% froma $102 million reported in second
quarter 2011.

Including stock compensation expenses of $12.9 million,
amortization of purchased intangibles of $20.9 million, non-cash
interest expense of $15.5 million and an income tax benefit of
$17.6 million, the company reported a net income of $103.8 million
or $1.63 per share in the quarter, compared with $69 million or
$1.19 per share in the year-ago period.

Alliance Data posted better-than-expected results based on strong
performances across all segments.

Operational Performance

Revenues in the second quarter were $866 million, up 17% from $740
million in second quarter 2011. The year-over-year upside is buoyed
by a double-digit increase across all the three segments. Results
surpassed the Zacks Consensus Estimate of $833 million.

Operating expenses spiked 14% year over year to $626 million in the
second quarter of 2012, primarily due to an 18% increase in cost of
operations.

Adjusted earnings before Interest Tax Depreciation and Amortization
(EBITDA) in the quarter under review was $292.8 million, up 23%
year over year, owing to double-digit improvement in all the three
segments.

Operating income increased 25% year over year to $240.5 million in
the quarter.

Adjusted EBITDA was $60.6 million, up 14% from $52.9 million in the
year-ago quarter.

During the reported quarter, operating income improved 15.3% year
over year to $53.4 million from $46.3 million in the year-ago
quarter.

AIR MILES reward miles issued increased 8% in the quarter.

Epsilon
: Segment revenues were $235.5 million in the second quarter, up
25% year over year.

Adjusted EBITDA was $48.8 million in the second quarter, up 24%
year over year.

Second quarter operating income was $20.5 million, up 30% from
$15.8 million in the year-ago period.

Private Label Services and Credit
: Revenues from the segment came in at $402.5 million, up 15% year
over year.

Adjusted EBITDA was $206.1 million in the quarter, up 26% year over
year.

Second quarter operating income improved 27% year over year to $195
million.

Financial Update

Alliance Data exited the quarter with cash and cash equivalents of
$642.2 million, nearly a threefold increase from $216.2 million at
2011 end.

Debt increased 11.2% to $2.4 billion at quarter end from $2.2
billion reported at 2011 end level.

Cash from operations in the first half of 2012 totaled $417.7
million, up 2.3% from the year-ago period.

Capital expenditures increased to $55.5 million in the first half
of 2012 from $33.8 million in the year-ago period.

Guidance

Third Quarter 2012

Alliance Data projects mid single-digit increase in revenue.

It also estimates low double-digit growth in core earnings. Core
EPS is expected to increase 1% to $2.18.

Full-Year 2012

Alliance Data raised its revenue projection to $3.50 billion from
$3.46 billion. This also represents a year-over-year increase of
10%.

The company revised the core earnings guidance upwards to $542
million from $536 million, exhibiting a 23% year-over-year
increase.

Core EPS is reaffirmed at $8.45.

Shares outstanding at 2012 end are projected to be 64.1 million, up
from 63.4 million guided earlier.

At the Peer

Discover Financial Services
(
DFS
), which competes with Alliance Data, reported second-quarter 2012
earnings per share of $1.00, a penny ahead of the Zacks Consensus
Estimate but lower than $1.09 recorded in the year-ago quarter.

Net income declined 10.5% year over year to $537 million from $600
million. Net income allocated to common shareholders also declined
to $532 million from $593 million in the year-ago quarter.

The decline in profits resulted from lower reserve releases, which
offset revenue growth and higher interest income. Results were also
affected by higher expenses and a decline in the pre-tax income
from the Direct Banking segment.

Total revenue, net of interest expense, increased 6.3% year over
year to $1.85 billion.

Our Take

Alliance Data remains well poised for the upcoming quarters based
on continued strong performance across the segments, solid
financial position and its focus on boosting shareholder value via
share buybacks. However, an increasing debt level makes us
cautious.

The company's adequate liquidity will help it continue with its
share repurchase activity as well as focus on strategic
acquisitions. The company forayed deeper into Brazil with its Dotz
program gaining momentum. Its retail service business will acquire
the private label credit card portfolio of
The Bon-Ton Stores Inc.
(
BONT
)

The quantitative Zacks #2 Rank (short-term Buy rating) for Alliance
Data indicates slight boost on the stock over the near term.

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